The affordability puzzle is the combination of price and interest rate, and it is evolving on us slowly. That may seem like a good thing, but unfortunately, psychologists have shown that humans struggle to adjust to slow-moving change. When there is a shock to the system, we react. When the system slowly evolves, we tend not to notice the changes and thus we typically fail to take action in time.
The end result is that humans are more likely to face unnecessary pain. That pain is caused by the result of slow evolutions that create a big problem, but because the change happened slowly we failed to prepare for the impact, and only take action once we feel the pain itself. We may very well be sitting in one of those moments in our industry right now.
Housing prices have been on the rise for an extended period now. Not the type of aggressive, hyperbolic price changes that preceded the Great Recession, but a long, slow, steady climb nonetheless. I’ve recently written about the supply side causes of those price increases and the challenges they present. Finished lot supply constraints, labor supply constraints, and overall general resale supply constraints have pushed prices above their real value into a state of traditional equilibrium. That means new construction prices are necessarily limiting the pool of qualified buyers to an artificially small share of the overall demand pool.
Now we add to that the slow increase of interest rates. Over the last 16 months, we’ve added 1% (or more) to the average 30-year fixed mortgage rate. For example, on a $300,000 home, that means a buyer has lost 10% of their buying power or has to pay an additional $50,000 of interest over the life of the loan for the same home today. All signs point to the fact that this upward trend will slowly continue.
This slow change, as outlined above, is in fact, the problem. We’re in danger of not evolving until it is too late. The combination of prices and rates creeping up could leave us in a position where, all of a sudden, we may start feeling the pain of disappearing demand, due to the shrinking of the affordability puzzle.
So here is the question to ask yourself. Are you doing anything right now to help equip your field sales and marketing team for this eventuality? Are you doing anything to help equip your team to succeed in the moment by leveraging this eventuality? Are you doing anything to help your customers understand the moment and the impact it will have on them eventually? If the answer is no to any of those questions, that’s a problem.
If you’re a New Home Star client, don’t worry. We just released multiple sets of proprietary training tools and resources to your team. We’re evolving with the puzzle. If you’re not a New Home Star client, maybe it’s time to consider changing that and gaining access to this network of new home sales resources. That market is evolving. Are you?
